The Game is Rigged – Here's How to Win Anyway

by Andrew Zatlin

It's one thing for Wall Street to rig the financial game.

It's another to do it out in the open, right under our noses.

Today, I'll tell you what going on, and I'll explain why our response shouldn't be to get mad...

It should be to get rich instead.


The Game is Rigged – Here's How to Win Anyway

In case you missed it, JPMorgan (JPM) just acquired First Republic Bank.

The deal involved a big bank scooping up a much smaller competitor. And it was 100% rigged by the federal government.

At first blush, that suggestion might make you mad. And while that feeling is valid, I suggest we focus on getting even instead.

Because this deal is about to spark a wave of acquisitions in the banking sector...

And I'll tell you how to get positioned to profit from the next one.

A Match Made in Heaven

We'll talk more about our profit opportunity a bit later. But first, let's explore the deal between JPMorgan and First Republic.

Simply put, this was a match made in heaven. First Republic needed cash – that's why it went bankrupt – and JPMorgan had too much cash on hand.

Let's focus on JPMorgan's situation for a moment, because it's key to understanding what I mean when I say that the game is rigged.

Every day, JPMorgan collects a certain amount of deposits, and it lends a certain amount to borrowers. Right now, it has $2.4 trillion in deposits, yet it's only loaned out $1.1 trillion.

Is this normal? Far from it...

All This Cash and Nowhere to Spend It

Actually, it's unprecedented. Let me show you:

This chart shows JPMorgan's deposits going back seven years. As you can see, between 2016 and 2019, the bank took in about $1.5 trillion in deposits a year and loaned out about $1 trillion.

Then COVID hit. Soon after, the Federal Reserve initiated what's known as quantitative easing ("QE") – basically an effort to help stimulate a stagnant economy. And as a result, big banks like Bank of America (BAC), Wells Fargo (WFC), and JPMorgan received a wave of extra deposits.

The thing is, those deposits just sat on these companies' books. The money wasn't available to be lent out. And it created a problem for JPM...

Until interest rates started soaring...

Pure Profits

When interest rates went up, suddenly the cash in JPMorgan's account became much more valuable.

For example, at 5%, that $1 trillion that can't be touched is earning $50 billion a year in interest. That's pure profit JPMorgan is collecting from money that's sitting there.

The same thing happened at other big banks, too. Suddenly, the money that was untouchable was making these banks even richer, all thanks to increased interest rates issued by the Fed.

Are you getting the sense that this game is rigged? It gets worse...

An Offer It Couldn't Refuse

You might wonder why JPMorgan decided to purchase First Republic. After all, the bank was small and had just gone bankrupt.

As it happens, JPMorgan was made an offer it couldn't refuse. Playing the role of Marlon Brando in "The Godfather," the Federal Reserve invited JPMorgan to bid on First Republic. It said, "We made you rich. Now you have to spend these riches the way we want you to."

But in case you feel bad for JPMorgan in this scenario, dry those tears. Because remember, the entire game is rigged in their favor...

A Sweet Deal

JPMorgan got a sweet deal to acquire First Republic. Notably, any loans that it will take over from First Republic will be covered by the Federal Deposit Insurance Corporation ("FDIC"). And any losses will be covered by the government – aka, taxpayers like you and me!

And keep in mind that First Republic was a unique bank. It was deep into the cryptocurrency sector and had several high-tech, high-net-worth clients. Now JPMorgan has access to them and can grow its business even further.

So, what happens now? I think we're going to see a big wave of mergers when it comes to smaller banks. After all, JPMorgan's big competitors are in similar situations. They've got excess cash and incentives to do a deal.

The thing we need to focus on is how to make money from all of this.

For 'Pro' Eyes Only

It's an intriguing situation. Do we invest in JPMorgan? Do we target a handful of smaller banks that might get scooped up?

If you're a Moneyball "Pro" subscriber, I'll tell you the exact move you should make today.

We're in it to win it. Zatlin out.



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